Fed will ‘respond’ to Deutsche’s change: Tarullo

RonaldD. Orol

WASHINGTON (MarketWatch) — A top Federal Reserve official said Thursday that the central bank will need to respond to a restructuring by Germany’s Deutsche Bank AG that seeks to protect it from U.S. capital rules being implemented in the wake of the 2008 financial crisis.

“As I think about the appropriate modes of regulation and supervision of foreign bank organizations in the U.S., the development to which you have alluded has certainly affected my thinking about how we do structured regulation of foreign bank organizations, and I think we will need to respond to that,” said Federal Reserve Gov. Daniel Tarullo at a Senate Banking Committee hearing, in response to a question about Deutsche Bank’s legal-structure change.

The Dodd-Frank Act, approved to address issues that led to the financial crisis, could have required Deutsche Bank
DB, -3.99%
(DBK) to infuse as much as $20 billion in capital into a U.S. subsidiary, Taunus Corp., according to a report in The Wall Street Journal, citing people familiar with the matter. Read more about Deutsche’s restructuring

Deutsche Bank’s move comes as the Fed prepares to issue a proposal on capital requirements for foreign banking organizations soon, according to a December statement from the central bank. A key concern for foreign banks with U.S. operations are bank rules adopted in June based on the so-called “Collins amendment” named after Sen. Susan Collins, Republican from Maine.

This provision requires big banks be subject to the same minimum standards for capital as community banks. Before the rule was established, big financial institutions that had implemented a global bank agreement known as Basel II (named after the Swiss city where past agreements have been reached) were allowed to use their own “internal management assumption” models to calculate how much capital they needed to hold.

Deutsche Bank reorganized its Taunus subsidiary so it is no longer considered a “bank holding company,” according to reports. A Fed official declined to comment on how the Fed might respond to Deutsche Bank.

Sheila Bair, chairwoman of the Federal Deposit Insurance Corp. between 2006 and 2011, raised concerns about capital at restructured U.S. operations.

“When an institution becomes stressed, long experience has shown that foreign banks and their regulators are reluctant to send capital abroad to support U.S. operations,” Bair told MarketWatch in an interview. “The only capital that matters is that which is here in the U.S. and can be accessed. That is the real issue that needs to be addressed.”

Volcker rule

The discussion about Deutsche Bank took place at a wide-ranging hearing that examined how the United States is coordinating with other governments on bank regulation.

Tarullo also responded to criticism from Canada and other countries over a controversial proposal that seeks to rein in banks’ speculative trading, known as the Volcker rule. Canadian and European regulators have issues with the regulatory proposal, named after former Federal Reserve Chairman Paul Volcker, arguing that it could impair the ability of their countries to sell government bonds.

The proposal, introduced in October, would prohibit big insured banks from trading stocks and derivatives with their own money. Regulators outside the United States have said they were worried about a provision in the measure that allows proprietary trading of U.S. Treasury securities, but prohibits the same transactions in non-U.S. sovereign debt.

Tarullo said that if institutions must cut back on trading of government-bonds, “there are other firms that are not subject to the Volcker rule who are out there who may well take up any slack.”

The countries contend the provision would undermine the liquidity of government-debt markets outside the United States, adding that foreign banks may struggle to manage their liquidity.

Tarullo added that there was misperception about the regulations by some foreign observers, and that some observers were not aware of certain exemptions. “If a foreign sovereign-debt obligation is held for investment and not a matter of short-term trading, that’s not covered.”

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